Thursday, February 03, 2011

Illinois Appeals Court Disregards Real Estate Deal Structured As Sale Leaseback w/ Repurchase Option; Says Arrangement Constitutes Equitable Mortgage

An Illinois appeals court recently upheld a Cook County trial court ruling that, given the facts of the case, a sale of a home, coupled with a contemporaneous leaseback and option to repurchase was not to be treated as an absolute sale, but rather, the transactions taken together were recharacterized by the court as an equitable mortgage.(1)

In addition to the 'standard' characteristics of these types of deals where a homeowner gets screwed over, one notable point was that the lack of a formal written leaseback agreement or option to repurchase was not fatal to the court's finding that the deal constituted an equitable mortgage under Illinois law. The homeowner gave uncontradicted testimony that the leaseback and repurchase option concepts were discussed by the two operators structuring the deal, and that it was proposed that one of them would draw up papers for those purposes, but no document was executed at closing for those purposes.

In determining that an equitable mortgage existed, the court made reference to the existing case law that it applied in the following excerpt:

  • In determining whether a constructive, or equitable mortgage exists our courts consider several factors, including:

    “ ‘ the existence of an indebtedness, the close relationship of the parties, prior unsuccessful attempts for loans, the circumstances surrounding the transaction, the disparity of the situations of the parties, the lack of legal assistance, the unusual type of sale, the inadequacy of consideration, the way the consideration was paid, the retention of written evidence of the debt, the belief that the debt remains unpaid, an agreement to repurchase, and the continued exercise of ownership privileges and responsibilities by the seller [Citations.]’ ”

    Robinson v. Builders Supply & Lumber Co., 223 Ill. App. 3d 1007, 1014 (1991), quoting McGill v. Biggs, 105 Ill. App. 3d 706, 708 (1982).

    The parties’ intentions are the key consideration and proof of these factors “must be clear, satisfactory and convincing” if they are to overcome a written instrument. Robinson v. Builders Supply & Lumber Co., 223 Ill. App. 3d at 1014. However, “it is not necessary that there be no conflict in the evidence presented.” Silas v. Robinson, 131 Ill. App. 3d 1058, 1062 (1985).

Among the factors that swayed the court in finding that the deal constituted an equitable mortgage was the disparity between the sale price and the value of the property. The deal, as structured, provided for a sale by the homeowner to the first purchaser for a price of $90,000 with a contemporaneous leaseback. Shortly therafter, the first purchaser sold the premises, subject to the homeowner's continued occupancy, to a subsequent purchaser for a contract price of $170,000.

As a result of the court's ruling, the deed to the first purchaser was deemed to be an equitable mortgage. Further, the deed by the first purchaser conveying title to the subsequent purchaser (the home remained occupied by the screwed-over homeowner throughout the entire relevant period - and who was still in occupancy as of the date of this ruling), and the mortgage obtained by the subsequent purchaser were both voided by reason of the fact that the subsequent purchaser was not entitled to bona fide purchaser protection.(2)

For the ruling, see Gandy v. Kimbrough, No. 1-10-0424 (Ill. Ct. App. 1st Dist. 3d Div., December 22, 2010) (when link expires, TRY HERE).

Representing the screwed-over homeowner was attorney Gilbert Liss, Chicago, IL.

Thanks to Linda Spak for the heads-up on this court ruling.

(1) See generally:

(2) According to the ruling, the subsequent purchaser simply made a brief conclusory argument that she conducted a diligent inquiry and was a bona fide purchaser, which the court found insufficient and constituted a waiver of this argument, and which it briefly addressed in this excerpt:

  • As noted above, Kimbrough has failed to provide adequate citation to the record or analysis of case law to provide any cogent argument with respect to her claim that she was a bona fide purchaser. “ ‘[A] reviewing court is entitled to have the issues on appeal clearly defined with pertinent authority cited and a cohesive legal argument presented. The appellate court is not a depository in which the appellant may dump the burden of argument and research.’ ” In re Marriage of Auriemma, 271 Ill. App. 3d 68, 72 (1995), quoting Thrall Manufacturing Co. v. Lindquist, 145 Ill. App. 3d 712, 719 (1986). Supreme Court Rule 341(h)(7) requires a clear statement of contentions with supporting citation of authorities and pages of the record relied on. 210 Ill. 2d R. 341(h)(7). Ill-defined and insufficiently presented issues that do not satisfy the rule are considered waived. Express Valet, Inc. v. City of Chicago, 373 Ill. App. 3d 838, 855 (2007). We will not sift through the record or complete legal research to find support for this issue.

(The foregoing should serve as a reminder that it's not enough to go into court and simply raise issues without the appropriate support, leaving it to the judge to figure out.)

It should be noted that, even though the court threw out the bona fide purchaser claim/defense on the grounds that issue was deemed waived by the subsequent purchaser, the weight of authority in Illinois case law appears to support the proposition that the open and visible possession of the home by the homeowner in this case places the subsequent purchaser, as well as any lender financing the purchase, on notice of any rights or equities she (the homeowner) may be able to establish, and upon said establishment, those rights or equities would have priority over any subsequently-acquired interests of others. See:

Life Savings & Loan Association v. Bryant, 125 Ill. App. 3d 1012, 467 N.E.2d 277 (1st Dist. 1984) [bold text is my emphasis; not in original text]:

  • Illinois courts have uniformly held that the actual occupation of land is equivalent to the recording of the instrument under which the occupant claims interest in the property. (Bullard v. Turner (1934), 357 Ill. 279, 192 N.E. 223; Beals v. Cryer (1981), 99 Ill. App. 3d 842, 426 N.E.2d 253). The open and visible possession of land by the equitable owner is sufficient to charge a mortgagee with notice of the rights of such owner, and the mortgagee will take subject to the rights of the person in possession. Williams v. Spitzer (1903), 203 Ill. 505, 68 N.E. 49.

Fidelity Trust & Savings Bank v. Williams (1936), 285 Ill. App. 131, 1 N.E.2d 739 (addressing the issue of whether the retention of possession by the grantor of property after it is conveyed constitutes notice of the grantor of his or her interest in the property, and to those claiming under the grantee, under Illinois law) [bold text is my emphasis; not in original text]:

  • The rule of law which seems to control in a like situation is that the retention of possession by the grantor of the property conveyed is notice of his or her interest in the property, and to those claiming under the grantee, and such rule is laid down in the case of Ford v. Marcall, 107 Ill. 136, wherein the court said: "The law is, as this court has declared in White v. White, 89 Ill. 460, that when the grantor of real estate remains in possession, all persons acquiring title from the grantee are chargeable with notice of all the claims of the grantor."

    This rule was followed and approved in the case of Ronan v. Bluhm, 173 Ill. 277, where the court said: "It is proper we should remark, in answer to the discussion upon the point, that as it is conceded by all parties that the said Thomas Ronan did not deliver possession of the premises in question to the grantee, Carbine, but remained in the open and exclusive occupancy thereof, appellee, Bluhm, is deemed, as matter of law, to have taken the conveyance from Carbine with full notice of all the rights and equities of said Ronan in the premises. Illinois Central Railroad Co. v. McCullough, 59 Ill. 166; White v. White, 89 id. 460; Ford v. Marcall, 107 id. 136." It is to be noted from what the court said in this opinion that Bluhm was deemed as a matter of law to have taken the conveyance from Carbine, the grantee of Ronan, with full notice as to all the rights and equities of Ronan in the premises.

    This rule has been passed upon by the courts of this State, and the law is again discussed and approved in the case of Rock Island & Peoria Ry. Co. v. Dimick, 144 Ill. 628. The court in this opinion said: "The law is well settled in this State, as generally elsewhere, when not changed by the recording acts, that open and exclusive possession of lands, under an apparent claim of ownership, is notice to those subsequently dealing with the title of whatever interest the possessor has in the premises, whether the interest be legal or equitable in its nature. Wade on Notice, sec. 273; Davis v. Hopkins, 15 Ill. 519; Truesdale v. Ford, 37 Ill. 210; Smith v. Jackson's Heirs, 76 Ill. 254; Partridge v. Chapman, 81 Ill. 137. It has been held also in this State, that if the grantor remains in possession after conveyance, purchasers from the grantee are affected with notice of the grantor's rights in the land. White v. White, 89 Ill. 460; Ford v. Marcall, 107 id. 136."

    In the case of Porter v. Clark, 23 Ill. App. 567, this rule was also approved, and in discussing the subject matter of the litigation, the court there stated what we regard as pertinent in its application to the instant case. This statement is: "If Porter, knowing as he did that Clark was in possession, had gone to him and inquired as to his rights, he would undoubtedly have been told that the purchase money had not been paid, and that he, Clark, claimed a vendor's lien on the land."

For more on the applicability of the bona fide purchaser doctrine in Illinois in similar situations, see:

For other states, see Bona Fide Purchaser Doctrine, Possession Of Property By Occupants Other Than The Vendor & The Duty To Inquire.

posted by Home Equity Theft Reporter at 4:06 AM